But listen, it doesn’t have to be
Don’t let the fear of climbing that mountain hold you back. Statistically speaking, the earlier you start the better your financial outlook is the closer you get to retirement.
People say, “start early, contribute often”.
But WHAT THE HECK does that mean?!? If you start early you can contribute less of your annual income than someone starting later. If you are 25, and contribute $5k for 43 years, you’d have 1.67 million (based on 8% market growth). If you are 35 and start contributing the same above but you only have 33 years to contribute, you would have $730k (www.investopedia.com). Big difference!
If you are financially able to, invest in a Roth 401k or Roth IRA.
Why Roth? The money you contribute is taxed when you put it in, it GROWS tax FREE, then when it’s time to retire you can withdraw that money and not pay tax on it.
Ok what’s the difference between a Roth 401k and Roth IRA?
~ The Roth 401k has advantages regarding a higher contribution limits, higher income earners can still utilize, & it’s common for employers to offer a ‘company match’. Company Match refers to the percentage of PRE-TAX dollars an employer matches to your contributions in your 401k. You’ll hear folks say this is “FREE Money”.
~ The Roth IRA sounds similar, right? It’s not, actually. Roth IRAs are funded with after tax dollars and grow tax free, but unlike the Roth 401k, you don’t ever have to take money from it if you don’t need to. These are called, “Required Minimum Distributions”. You can also choose from a WIDE RANGE of investment options.
Disadvantages of Roth 401ks
Include the requirement at age 72 to withdraw money from it whether you need to or not. Investment options are limited and usually are managed by a “Plan Administrator”. Simply meaning, you can’t really choose stocks, bonds, ETFs, Mutual Funds, etc independently.
Conversely, Roth IRAs have an income limit. Meaning if you make over $139k/$206k (single/married), you CANNOT contribute to one. They also have a low contribution limit of $6k compared to the Roth 401k which is $19,500.